India is a consumption-driven growth story. But make no mistake: it’s a story that has been well bought.
Almost 60 per cent of India's gross domestic product (GDP) consists of consumption and only a third is on account of investments. A young working population, emerging middle-class, rapid urbanisation and growing per capita income are harbingers of a consumption boom or a consumption J-curve effect in the days to come.
But things aren’t adding up. Investment, a pre-requisite for such growth to sustain over a long period, is failing to take-off. Investments have slipped once again by 1.2 per cent year-on-year ( y-o-y) in the fourth quarter of 2011 from that of four per cent decline y-o-y in the third quarter of 2011. This is the fourth consecutive quarter of deceleration in investment. Historically, investment cycle growth has been a precursor to consumption-led growth — be it the US of the '50s or Japan in '60s or China in the '80s and '90s, or more recently, India between 2004 and 2009, when growth crossed nine per cent. The arithmetic is simple. If an economy is operating almost at full capacity and less and less new capacities are being added, then somewhere down the line, even the most robust consumption engine will begin to sputter. More, if demand in the economy continues to be buoyant, then you have the classical inflationary situation of too much demand chasing too few goods.
For India, time is running out. Doing nothing is no more an option for the authority. If we lose it now, then we may be stuck in a rut of slow decline. Perhaps the only saving grace is the turn in the interest rate cycle; it’s no longer a question of “whether”, but “when”. The government has started, albeit only recently, making the right kind of moves. Hopefully, the replacement investment cycle should start gathering pace now. Should that happen – and chances are it could - the opportunity lies beyond the conventional benchmark stocks. Consider this: if we knock off the financial sector from the Nifty index, then with only one-fifth of the remaining Index stocks, we can play a pure investment story; together, these stocks contribute less than a tenth of Nifty earnings. Therefore, just by default the consumption story of the economy is already factored into the index and, therefore, well bought.
If one wants to play pure investment cycles from here, then one needs to look either beyond conventional benchmark stocks or play it indirectly through financials. Most of us prefer to toe the second approach, as fund mandates rarely permit us to look too much beyond the benchmarks. But a little more courage and a little less of consumption in the portfolio may make a difference.
The author is Chief Investments Officer, AEGON Religare Life Insurance